If you’re contracting with a personal service company (PSC) in the private sector, you should be familiar with Status Determination Statements (SDS). However, if you’re not, we’ll provide a quick snapshot for you. After all, we’re not just here to advise contractors looking at umbrella companies! We want to assist every temporary worker, where possible! Please keep reading to find out more.
Changes are coming soon (off-payroll in the private sector)
In April 2017, changes to IR35 (referred to as ‘off-payroll’) were introduced into the public sector. To summarise – contractors working through a personal service company (PSC) in the public sector were no longer able to determine their IR35 status. Instead, this became the responsibility of the end-client (the public sector organisation).
Similar changes were announced for the private sector, and they were set to come into effect from April 2020. However, due to the coronavirus pandemic, the government delayed changes to off-payroll in the private sector for 12 months, meaning they’ll be introduced in April 2021.
Who will be impacted by changes to off-payroll legislation?
Limited company contractors and the supply chain of personal service company PSC workers will be impacted, including hiring agencies and private sector businesses.
Suppose you are already using an umbrella company for your payroll. In that case, it’s likely your assignment has been classed as inside IR35 already and you’ll be receiving your pay with the appropriate tax and National Insurance deductions (PAYE). Therefore, the changes to off-payroll legislation will not impact you.
What is a Status Determination Statement (SDS)?
Private sector organisations that engage with temporary workers will need to carry out a thorough review of each assignment, and decided whether or not each individual contract is inside or outside IR35. This is what a Status Determination Statement (SDS) is – a detailed document that explains why an assignment and a contractor has been deemed inside or outside IR35.
Once an SDS has been created, it will need to be shared with the entire supply chain to ensure the contractor or freelancer is paid accordingly.
IR35 assessments should be made with ‘reasonable care’
Private sector businesses will be required to take ‘reasonable care’ when creating each SDS. If they don’t, they could be liable for unpaid tax and National Insurance. The government’s guidance states:
“The client must take reasonable care when determining whether the worker would have been an employee if they were engaged directly. If the client fails to take reasonable care, the responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC will rest with it.”
But what is ‘reasonable care’, according to the government? Well, they don’t specifically confirm exactly what ‘reasonable care’ is, but we can get a good idea from their Employment Status Manual. For an organisation to be able to confidently say they’ve taken ‘reasonable care’ when creating a Status Determination Statement, they must:
- Apply all employment status principles
- Use the government’s CEST tool (which is often scrutinised)
- Apply HMRC guidance on status determinations
- Engage with expert third-parties, such as IR35 specialists
- Ensure people involved in the SDS process have a “good understanding of the work to be undertaken involved in the determination process”
- Check existing determinations to make sure they’re still correct
- Review processes ongoingly
- If a role changes, make sure a new assessment is made
- Checks the processes used by third-parties, if they’ve contributed to an SDS
Now is the time to ask questions – before it’s too late
If you’re working on a temporary assignment in the private sector and its schedule to run into or beyond April 2021, you should already have received information from your end-client about your IR35 status. If you haven’t, we recommend you get in contact with them at your earliest convenience. And, if you sourced your roll through an employment agency, have a word with your contact there too. If you use a contractor accountant to help you with the running of your personal service company, they should also be able to offer you dependable advice.
You may be required to use an umbrella in the near future – even if the idea is completely new to you
If you are deemed inside IR35, you may be required to use an umbrella company. For contractors inside IR35 – umbrellas are almost certainly the best option. Your take home pay retention will be noticeably lower than when you were contracting outside IR35 through a PSC, but that’s not the umbrella company’s fault. There are plenty of advantages and disadvantages of using an umbrella company – so it’s not all bad!
Umbrella companies process PAYE – a government tax system that is used for permanent employees. You’ll become an employer of the umbrella company and will be required to submit timesheets for the hours you’ve worked. Your client will send your funds to your agency (if you have an agency), your agency will send your gross funds to your umbrella, your umbrella will make the legal deductions (PAYE), and you’ll receive your net salary.
For more information on how umbrella companies work, check out our Umbrella Companies Explained guide.
Top 10 umbrella companies
Umbrella companies are becoming an increasingly popular payroll method for temporary workers, especially for those deemed as inside IR35. If you are required to use an umbrella company at some point in the future, you must choose a compliant provider and avoid tax avoidance schemes.
To help make your life easier, we’ve collated a list of top 10 umbrella companies. All of them are accredited by the FCSA, a leading professional body dedicated to ensuring the supply chain of temporary workers is compliant. We recommend you check them out, as some of them have wonderful special offers on at the moment.